Is a 0% car loan really a good option?

The 0% car loan: an auto buyer’s dream or a deal that’s too good to be true?

When shopping for a new car, you’ll come across advertisements for car loans with extremely low interest rates — sometimes even 0%. This type of dealership-offered loan is generally a sales tactic.

Before signing the dotted line and driving off the lot, there are some things you need to know about taking a 0% car loan.

What’s the catch with a 0% car loan?

At first glance, a car loan with a 0% APR (Annual Percentage Rate) is exactly what it appears to be – you purchase the car at the agreed-on price, and then make monthly payments on the principal of loan sans interest. However, keep the following points in mind:

Why would a dealership offer a 0% car loan?

There are different reasons dealerships offer zero interest car loans. One reason is to get potential buyers in the door. Once a buyer has entered into a salesman’s territory, the sales battle has begun.

Another reason is to move inventory. By offering a 0% car loan, they can get rid of the cars that have been in the lot too long and make a profit at the same time — even without charging interest on the loan.

The most common place to find 0% financing is through a dealership — banks and online lenders generally aren’t as worried about moving cars out of the lot at a fast rate. You can often find deals advertised online, at dealerships or on manufacturer websites. If you have liked working with a particular dealership in the past or have a specific carmaker in mind, you might want to start your search there.

Can I qualify?

Despite what some ads appear to promise, you generally can’t qualify for 0% financing unless you have good or excellent credit. You also might have trouble qualifying if you already have a lot of debt obligations compared to your income.

Some customers feel that they were lured into a dealer with the promise of 0% financing that they weren’t eligible for. To avoid this, try calling the dealer ahead of time to make sure you’re eligible.

Alternatives to 0% dealer financing

Even if you can’t secure a 0% car loan, there are plenty of car loan options including auto title loans and low interest rate loans from dealerships, banks, credit unions, and online lenders. You may also be able to get a personal loan to finance a car. Have below-average credit? Not to worry. There are lenders who offer loans specifically for people who have bad credit or low incomes.

What are the benefits of 0% finance?

When it comes to financing a car, there are a number of options involving 0% loans that may work in your favor. When comparing loans, be sure to consider:

• A shorter loan term. With shorter loan terms comes larger monthly payments. You’ll likely pay off your loan in just several years instead of the average five to seven.
• No interest. Your payment goes directly towards the principal of the car.
• Optional extras. With a 0% car loan you may be able to roll the cost of alloy wheels, leather interior, sunroof or any other luxury items into the finance.

It’s possible to get a car loan with no down payment — but it might not be the best idea. That’s because there’s a higher risk of ending up with an upside down car loan, where you owe more than your car is worth. If possible, try to save up at least a few month’s worth of payments and pay this amount in advance as a down payment for your car. A good rule of thumb is to make a down payment that’s equal to 10% of your car’s value, if possible.

4 tips to make the most of 0% financing

There are few strategies to use that can help you use your loan as efficiently as possible when buying a car with 0% financing. These are:

1. Keep your loan under 60 months. There are longer car loans on the market that may seem attractive because of their low monthly payments, however, you’ll pay loads more in interest. By the time you’re done paying off the loan, your car will have depreciated greatly in value. But if you pay off the loan sooner, it will have a greater trade-in value should you wish to buy another vehicle.
2. Make a large down payment. By making the largest down payment your budget allows, you’ll lower the principal and may be able to take on a loan with a shorter term, which will make you the full owner of your car faster.
3. Get pre-approved. Getting pre-approved for a loan will not only give you bargaining power when shopping for a car, but you’ll also know exactly how much you’re able to spend.
4. Pick a car you love. Don’t rush into buying a car just because you’ve been offered a great financing deal. If the car isn’t the right fit for you, keep shopping so you don’t make a purchase that you’ll later regret.

Bottom line

Before you lock yourself into a 0% car loan, research banks and private lenders to see if they can offer you a car loan with terms that are more suited to your financial situation.

Frequently asked questions

• Do I need a down payment for a 0% car loan?

  That depends on the lender. However, a down payment will knock off a chunk of the principal and result in lower monthly payments, so it’s good to make a down payment if you can. Additionally, if you do not make a down payment, the value of the car may depreciate faster than you can pay it off, resulting in an upside-down loan where you owe more than the car is worth. Paying down a sizeable portion of the car right from the start is a good way to stay ahead of its depreciating value.

• Can I get a 0% car loan for a used car?

  It’s very uncommon. If you’re offered a 0% car loan for a used car, be sure to read all of the fine print to see if there are any extra costs or fees to make up for the lack of interest being charged.

• What credit score do I need to qualify for a 0% car loan?

  While this varies between lenders, a credit score of at least 750 is recommended, but won’t necessarily guarantee that you’ll be approved for the promotion.

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